The Black Hole of Private Credit That's Swallowing the Economy

SPEAKER_1 (0:03)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:25)

And I'm Joe Weisenthal.

Tracy Alloway (0:26)

Joe, do you remember reading headlines like the incredible shrinking stock market?

Joe Weisenthal (0:31)

Yes, I forgot about that whole period. A lot in the 2010s, in which there were not a lot of new IPOs, companies that were waiting longer in their life cycle to go public. It's kind of crazy. Now you have these multibillion dollar companies that are still private. And then you look at when Microsoft and Apple and all those went public. And it was like no one knew anything about them when they first came out.

Tracy Alloway (0:59)

Yeah, that's true. And I think it's still pretty much an ongoing trend where you do have more companies deciding not to raise public stock at all. So they'll just stay private forever. They'll tap venture capital or whatever for their funding needs. And obviously, the stock market has grown in size in terms of market cap, but maybe not necessarily in terms of absolute available shares. And this has been a sort of ongoing trend and discussion.

Joe Weisenthal (1:26)

Totally. Private financing has just gotten so huge. You know, talk about private equity and VC and all of this stuff, that there is an incredible amount of money. In fact, the one time when the public market spigot opened like crazy was the SPAC mania. And so many of those companies turned out to be total garbage. So there's obviously some reason why, at least in the stock market side, you know, it's almost like opting to go the public route is almost like a red flag.

Tracy Alloway (1:55)

Oh, that's a terrible thought. But you're right.

Joe Weisenthal (1:58)

But there seems to be something to that, right? And that's what we've seen in the last several years.

Tracy Alloway (2:01)

OK. What if I told you that a similar trend to the one that has played out in the stock market is now happening in the corporate debt market?

Joe Weisenthal (2:10)

We've obviously talked about private credit a fair amount on the show. But it had not occurred to me, until you just put it that way, the idea that maybe there's some sort of like parallel here about the way in which, yes, the incredible shrinking stock market might at some point reflect, maybe we'll talk about the incredible shrinking bond market one day.

Tracy Alloway (2:29)

Yeah. Both bonds and loans, right? I think the way you could maybe summarize what's been going on with the corporate debt market is for a long time, up until relatively recently, we had a lot of companies that were issuing bonds, so selling those to investors, or they were taking out loans from banks, or they were taking out loans that would be intermediated by banks and then sold onto more investors. Those are called leverage loans. This was what we had seen in the stock market in the 80s, the 90s, maybe the early 2000s, lots of companies coming to the public market via debt. But now, with the rise of private debt, again, the clue is in the name, more and more loans and bonds are instead being made by what are known as direct lenders, private equity, this shadow finance group of financial entities. They're doing more of this, and there's less bonds and loans that are actually being publicly distributed to investors.

Joe Weisenthal (3:36)

Right. We've talked a lot about the why of private credit and various advantages and certain types of companies and industries that maybe banks don't service directly or maybe some flexibility. Have we ever really talked about the consequences or some of the, like, all right, what does that then mean about if so much of the credit market goes private like this?

SPEAKER_1 (3:58)

Yeah.

Tracy Alloway (3:58)

And this is the thing I find really interesting because there's so much hand wringing about the financial stability concerns of private debt. So is this just a gigantic bubble and everything's going to blow up one day? But there are actually immediate concerns, things that are happening right now.

So I'm very pleased to say that we have the perfect guest. We are going to be speaking with the authors of a paper called The Credit Markets Go Dark. It's a really great paper. I wrote about it a few weeks ago in the Odd Lots newsletter, which you should all subscribe to. And we're going to be diving into it in some more detail now. So we're speaking to Jared Ellias. He is the Scott C. Collins Professor of Law at Harvard Law School, and his co-author, Elisabeth de Fontenay. She is the Carl W. Leo Professor of Law at Duke University School of Law. So Jared and Elisabeth, thank you so much for coming on Odd Lots.